Rafale Deal: Defence Procurement Policy To Blame For Reliance Row?

Defence Procurement Policy of 2016 says that the government cannot decide offset partner for the foreign vendor. But the same policy provides for an indirect room in finalising offset partner for the seller. India is buying 26 Rafale fighter jets from French firm Dassault Aviation. Defence procurement policy requires Dassault to have an offset partner. Dassault chose Reliance Defence as its offset partner

by Prabhash K Dutta

Presence of Reliance Defence in Rafale deal has been hot potato in politics for several months with the Opposition crying foul. While the Congress has accused Prime Minister Narendra Modi of corruption, the Supreme Court on Wednesday reserved its judgement whether the Rafale deal calls for a probe.

At the centre of this controversy lies the decision of making Reliance Defence of industrialist Anil Ambani an offset partner of the Dassault Aviation, the manufacturer of Rafale fighter jets. There is also an issue of pricing but Reliance as offset partner of Dassault in Rafale deal has made the maximum noise.

So, Why Reliance Features In Rafale deal

The Dassault Aviation, the Reliance Defence and the Modi government all have maintained that the company was chosen as an offset partner by the Rafale manufacturer. The Dassault is required under the Defence Procurement Policy (DPP) to engage with an Indian partner for manufacturing some defence equipment under Make In India initiative.

The Opposition says that Dassault chose Reliance under pressure from the Modi government. Congress president Rahul Gandhi went on to accuse PM Modi of extending a helping hand to Anil Ambani in order to bail his Reliance group out of financial difficulties.

What Is The Offset Clause In DPP?

The offset clause in the Defence Procurement Policy of India was introduced in 2005 inspired by similar practice in several developed and developing countries. Pranab Mukherjee was the then defence minister in the UPA government of Manmohan Singh.

The policy was revised in 2016 by the Modi government. Manohar Parrikar was the defence minister back then. The offset clause was brought originally to have a world-class defence and aerospace industry in India.

What Are Offsets?

In simple words, offsets are compensations that a seller gives the buyer against the purchase order it placed with the company. In Rafale deal's case, Dassault is the seller, India is the buyer and Reliance is the firm where compensation is to be paid. But Reliance is not the only firm to get that compensation for buying Rafale fighter jets.

Offsets include outsourcing of items, targeted investments and transfer of technology. The concept of offset in defence deals emerged out of competition in the international market with developing countries opting for those firms which promised to aid indigenous defence industry.

India's Offset Policy

The offset clause in India's DPP (which can be read here, page 63-84) makes it mandatory on the seller or foreign vendor to offset 30 per cent of total procurement cost provided the deal is worth more than Rs 2,000 crore. The Rafale deal is said to be worth 7.8 billion euros.

The foreign vendor is free to choose its Indian Offset Partners (IOPs) under 2016 policy and the government cannot directly decide in the matters of offset partners. But, there is a remote control for the government.

The defence procurement policy says that the offset partners (IOPs) need to have requisite licences, which is given by department of industrial policy and promotion (DIPP) of the government. Further, the government has the power to ban any Indian company from becoming an offset partner of a foreign vendor.

The policy also makes the government the approving authority for offset proposals. Once the offset partners are finalised, any changes in the foreign vendor-offset partner relation has be to approved by the government. This puts government in commanding position with regard to deciding on offset partners but only indirectly.

So, Why Question Reliance Being An Offset Partner?

The government gave its nod for Reliance Defence as an offset partner of the Dassault Aviation. The Opposition says that decision was taken bypassing due process as Reliance Defence had no prior experience of defence manufacturing and was a newly registered company when it was made an offset partner by Dassault Aviation.

Secondly, offset investments are essentially tax-payers' money. The government pays the foreign vendor out of revenue collected from the tax-payers. The foreign vendor reroutes a part of that money in companies, which could be private also, back in the country. So, tax-payers' money is being invested in a company that would work for its own profit.

Interestingly, the Modi government decided to waive off the offset clause while finalising the S-400 air defence missile systems with Russia recently. There would be no offset partner in S-400 deal, at least for now. It was apparently done to ensure speedy delivery of S-400 systems to India.